Riding the Crest of Growth

Turkish economists can afford a smile or two these days, particularly after last week's meeting of the Executive Board of the International Monetary Fund (IMF) gave the country a qualified thumbs up. Turkey is making good progress under its IMF stand-by arrangement, triggering the release of another $661m loan package. However, while a positive development, this move still highlights the need to address a number of domestic problem areas.



Government officials have naturally enough dwelt most of all on the positive economic indicators - of which there are many. In an official statement last week, the managing director of the IMF, Rodrigo Rato, pointed to Turkey's consistent rate of economic growth. Promisingly, growth projections for 2004 have inched above the 5% target that was set early in the year. In tandem, GNP soared 12.4% in the first quarter of 2004, compared to the same period last year.



This perky trend has accompanied a continuous decline in inflation, which registered an impressive 9% for the month of July, below a target of 12% for the year. Whilst Turkey's long-standing struggle with price rises had also bore positive results in 2002 and 2003, the figures for 2004 have motivated particular confidence in the downward shift. Meanwhile, in a further sign of confidence, the government is set to remove the proliferation of zeros from Turkish banknote denominations at the end of this year.



But whilst fiscal discipline and prudential monetary policy has been key to the country's success, economic imbalances have continued to form. The flip side of fast industrial growth and increased consumer demand has been Turkey's rising trade deficit, which has neutralised any unadulterated optimism. Soaring 84% y-o-y to $16.84bn in the first half of 2004, this gap is no small matter. In the meantime, local analysts predict a trade deficit of $30bn by the end of the year, based on the current trend.



Hand in hand with an imbalance in trade has been the country's current account deficit. Registering at $8.881bn already in May, the deficit overshot the government's target for the entire year. Politicians in the meantime need little reminder that - aside from the pegged currency regime - it was Turkey's current account difficulties that triggered the 2001 financial crisis; and the prospect of external shocks, such as a further surge in oil process, must not be underestimated. This is in spite of the fact that the ruling Justice and Development Party (AKP) aims - as far as it can - to avert the smallest of bumps in today's economic recovery.



In the meantime, many a furrowed brow has scrutinised the debt stock of Turkey's private sector- registered at $33.3bn at the end of June. The opposition Republican People's Party (CHP) claims that consumer-loan and credit-card usage rose 62% in the first six months of 2004. These figures imply that growth is largely financed through short terms sources - a signal of increased private debt.



But the issue with the greatest weight for most Turks is the question of unemployment, which - as yet - has shown little signs of improving. The official rate of unemployment in fact rose to 12.4% in the first quarter of 2004, up from 10.5% in the previous quarter. In the meantime, the government has had to deal with an increased number of Turks returning from Germany due to a lack of employment opportunities there. Though negligible as a proportion of the whole, the trend threatens to add to the number of unemployed in Turkey over the coming years.



But concerns regarding today's figures have been met with a decisive riposte. World Bank Turkey Director Andrew Vorkink points to the fact that sustained growth in the economy does lead to the creation of jobs, though with something of a time lag. Given that Turkish growth derives largely from increased production in the private sector, rather than increased government expenditure, job creation is likely to be greater in the long term. Patience is therefore key.



Those who fret about the current account and trade deficit cannot ignore the prospects for improvement either. Tourism receipts over the summer are expected to help balance some of Turkey's debt. Last year, the total number of tourist arrivals between January and August reached 9.04m, with the majority entering Turkey during the summer months. At the same time, a lower level of bank lending to consumers in June, and the depreciation of the lira, should help to further defuse domestic pressures.



Meanwhile, the government has reiterated its unwavering commitment to slashing debt. Economy Minister Ali Babacan has already laid out the map for 2005: with the intensification of structural reforms and a head-on approach to economic imbalances on the cards. In this context, the AKP has reason to emphasise its recent achievements, such as the fact that the ratio of net debt stock to GNP fell to 70.5% in 2003 from 91% in 2001. Further comfort derives from the fact that the central bank has been able to build reserves during the first half of 2004. In the background, Turkey's floating exchange rate and tight-buckled approach to the economy has mitigated unnecessary bumps to stability. No coincidence then that the IMF expects the current account deficit to drop to 2.4% of the country's GDP in 2005, down from 2.9% in 2004.



Confidence has also ridden on Turkey's political scene at home. Hats off to the AKP which, thanks to an overwhelming parliamentary majority, has been able to push through political, social and economic reform. This is not to deny the patchy record of privatisation and red-tape cutting, with the latter remaining an obstacle to foreign direct investment (FDI). Yet the country can also expect an influx of FDI in the event that Europe finally opens its doors to Turkey, with December this year crunch time for a decision on this. In the case of a positive result, complete alignment with European Union (EU) standards would then be guaranteed and Turkey would be somewhat more protected from the uncertainties of a volatile global economy.



In spite of some concerns, Ankara can be pleased with its performance. Turkey has demonstrated its tenacity with growth levels up and inflation down. Yet how this develops hangs, as with much else in the country, on that crucial December day in Europe.